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How to Profit From Red-Hot Adobe Stock Before Earnings

Adobe (NASDAQ:ADBE) is part of the novel coronavirus posse, meaning quarantine was a great driver for its business. As people rushed to get online, demand increased exponentially for its products and services. Consequently ADBE stock is up over 50% this year, and while it pales when compared to Tesla (NASDAQ:TSLA) or Zoom Video (NASDAQ:ZM), it is still outperforming the broader market.

Adobe (ADBE) logo on wall of corporate building.
Source: r.classen / Shutterstock.com

This is great news for current investors, but chasing stocks while they are at all-time highs is asking for trouble. We saw what could happen yesterday as the tech sector had a wretched day. Apple fell 10% in 12 hours and the Nasdaq Composite fell almost 5% in one session.

What goes up must come down, and the longer high-flying names go without resting, the worse the accident.

As great as Adobe is, its stock is far too high to chase. This is not a knock against what the team at Adobe is doing, but it is a matter of picking the right levels to start long positions. I have issues with the price action because after decades of investing, I have never seen anything like this before. Investors have to be humble and admit that we are in uncharted waters.

Therein lies the reason for my cautionary tone today.

ADBE Stock Does Have Plenty of Support

Adobe (ADBE) Stock Chart Showing Buy-the-Dip Levels
Source: Charts by TradingView

The United States is headed into an election season very soon and politicians are acting irresponsibly. Lawmakers just took a two-week recess before they could agree on a stimulus package. That shows they are not focused enough on their constituents. Because of this, I am confident they will do more to shake investor confidence soon.

Coming into these highs I was also confident we would get a correction this year. If what started yesterday persists, the good news is that even though ADBE stock is vulnerable, it has many support lines. Buyers are likely to step in at various levels from current price into $505, $485 and $460 per share. The zone between $415 and $390 should be bulletproof in case the selling intensifies.

I know it sounds crazy discussing 20% corrections, but keep in mind it just rallied 100% since March.

Fundamentally, I do have a bone to pick with its valuation. ADBE stock carries a 67x price-earnings ratio, but I can overlook that. This is a growth stock so I expect it to spend a lot to deliver the growth. My problem is with its 21x price-sale ratio. That is too high — it is more than Amazon (NASDAQ:AMZN) and Facebook (NASDAQ:FB) combined.

Price-sales ratios are an important metric because they shows how much potential froth investors could shed during panics on Wall Street. Anyone who buys the stock today is fronting the company 21 years worth of sales for the privilege of owning the shares now.

There Are Other Ways to Trade Adobe Now

Technically, the bulls are in charge of the action. They have established a strong higher-low and higher-high trend since the March bottom. What is more important is that they spent two months consolidating the price action above $410 per share. This gives the bulls a solid base to make room for higher prices, and the confidence to catch the falling knife if the selling persists.

Adobe is going into an earnings report soon and those are binary events. Not even the CEO could guess how traders will react the morning after. Buying a full position into that makes for a coin flip. Alternatively, using options, eager investors do not have to wait for a dip to buy ADBE stock.

The options markets are pricing in about an $80 move in either direction for October. An investor can sell the October $385 put and collect almost $10 for it. This leaves a 25% buffer from here before they lose money. And if the share price stays above $385, then they would profit without even needing a rally — and with no out-of-pocket expense.

On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Nicolas Chahine is the managing director of SellSpreads.com. Join his live chat room for free here

Article printed from InvestorPlace Media, https://investorplace.com/2020/09/profit-from-red-hot-adobe-adbe-stock-before-earnings/.

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